Where Crowdfunding Met Its Match

WHY YOU SHOULD CARE

Because solving African woes will take more than goodwill and good ideas.

July 8, 2015

Patrick Schofield drank the crowdfunding Kool-Aid a few years back and became so convinced of its potential that he launched a campaign site in his native South Africa. Indeed, crowdfunding seemed a perfect fix for the myriad woes African entrepreneurs suffer: poor access to credit, high interest rates and painful transaction costs.

Not so fast. While Schofield’s Thundafund, established in November 2013, has raised roughly $350,000 for 116 projects, crowdfunding hasn’t proven the panacea he’d hoped. Overseas transfers are a bureaucratic nightmare, Internet access can be dicey and some would-be donors see crowdfunding as charity, not investment. As a result, the initial sheen has worn off of what is hoped will become a great catalyst for African entrepreneurship, forcing proponents to rethink some core assumptions. The idea has been slow to catch on, Schofield admits, noting how potential African donors initially wondered if crowdfunding was something akin to a Ponzi scheme or “someone who’s trying to run away with my money.”

To be sure, it’s far too soon to issue a verdict on crowdfunding’s potential in Africa. Just a few years ago, most crowdfunding for the continent was directed at charity; today some 30 sites focus on rewards-based loans for small businesses, including M-Changa, Thundafund and Smala & Co, some of which hope to expand into equity-based platforms soon. “We’re seeing a steady increase,” says Emily Mackay, founder of Crowdsurfer, a Bloomberg-like aggregator for online funding and peer-to-peer finance. And while Africa-based crowdfunding — which raised $12 million last year — is still a drop in the bucket, the global market is raging: Investment reached $16.2 billion worldwide last year, up from $6.1 billion in 2013, according to industry advisory firm Massolution.

The appeal is logical enough. In most African countries, the financial infrastructure doesn’t support ambitious entrepreneurs. Interest rates can hover in the range of 30 to 40 percent — that is, if you qualify for a loan. Most people don’t, because building a credit rating is near impossible without credit cards. That’s exactly the problem Marcel Ouedraogo, a soybean processor in Burkina Faso, faced and why he found the crowdfunding site BlueBees a work-around, through which he raised $37,000 in loans.

There are pesky financial regulations and laws, some of which have not caught up to the digital era and require work-arounds.

But lack of financial infrastructure cuts both ways. Many Africans can’t invest through crowdfunding sites that use credit cards or PayPal; credit uptake is generally low. And if you’re lending from another country, watch out, because Western banks regularly block payments to African merchants for fear of fraud, says Schofield. This means that the 40 percent of Thundafund’s donations that come from overseas often get blocked and require hours on the phone to resolve (so much for reducing transaction costs). Then there are pesky financial regulations and laws, some of which have not caught up to the digital era and end up requiring their own elaborate work-arounds.

To get around a public code that restricts certain types of lending, for instance, Smala & Co set up shop in France, instead of Morocco, where it operates. But then it ran into another problem: It initially accepted only euro donations, but Morocco’s fixed-currency regime — which is mirrored across North Africa — severely restricts how much Moroccan money can flow out of the country, posing another barrier to Moroccan investment.

All of this might sound trivial, but crowdfunding’s problems in Africa are no small matter — largely because the continent’s credit crunch is a real obstacle to growth, and has for decades vexed World Bank experts and street vendors alike. While no one expected crowdfunding would fix everything immediately, there was and is hope that it will reduce barriers to entry for small businesses, unleash economic growth and even promote equality.

Yet for many would-be entrepreneurs (and donors), reliable Internet access has been a barrier to entry. According to Internet World Stats, Africa has the lowest continental percentage of online users globally, at just 27.5 percent, and broadband is patchy and pricey. On the other hand, mobile subscriptions now stand at over 50 percent, making cell phones the most-used device for accessing the Internet in Africa. This requires new crowdfunding platforms to launch on mobile first, rather than in desktop format. “It’s nuts at this point to even think of launching for a PC or laptop-based format before going mobile,” says Schofield, who launched first for desktop just 18 months ago.

Indeed, one of the main challenges for crowdfunding has been adapting what was once considered a passive platform to local realities. M-Changa, for instance, is trying to gain community trust by appealing to traditional notions of helping one another, while others take a small-scale approach in a bid to offer what big crowdfunding sites cannot: customization to suit local needs. Localizing payment has been a necessity. For Thundafund in South Africa, this means electronic funds transfers, while M-Changa in Kenya relies on mobile-payment technology for one-to-one giving. Smala & Co, in Morocco, now accepts dirham checks, and the proportion of European to Moroccan donations has shifted from 80:20 percent to 60:40 in just a few months.

But intense localization can make scaling difficult. Smala & Co, for example, generated only around 60 to 70 submissions last year, and only a fraction were approved. BlueBees, a French-based platform focused on African agricultural projects, also struggles to find talent, so much so that director Emmanuelle Paillat says she’s now having to take on projects from outside Africa in order to survive. Others believe they’ve been too restrictive and will soon allow any projects, so long as they’re legal, in a bid to boost returns.

Still, Schofield remains a crowdfunding evangelist, and in five years’ time, he says, people will ask, “Why would you ever launch a new product into the world — or a new idea — without crowdfunding it?”